SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the nine month period ended September 30, 2018
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __ to ___
Commission File No. 000-55391
POWERCOMM HOLDINGS INC.
(Exact name of registrant as specified in its charter)
| Delaware | 47-3152668 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
3429 Ramsgate Terrace
Alexandria, VA 22309
(Address of principal executive offices) (zip code)
571-259-8773
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days). Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller Reporting Company | ☒ |
| Emerging growth company | ☒ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1) of the Exchange Act.☐
As of December 3, 2018, the Company had 24,330,000 shares of its common stock, par value $.0001 per share, issued and outstanding.
POWERCOMM HOLDINGS INC.
TABLE OF CONTENTS
POWERCOMM HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2018 | December 31, 2017 | |||||||
| (Unaudited) | * | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 628,730 | $ | 715,499 | ||||
| Accounts Receivable, net | 1,553,498 | 401,919 | ||||||
| Prepaid expenses | 207,584 | 126,162 | ||||||
| Other current assets | 148,249 | — | ||||||
| Total Current Assets | 2,538,061 | 1,243,580 | ||||||
| Furniture, fixture, and equipment, net | 3,394,598 | 1,114,425 | ||||||
| Deferred line of credit costs | 11,457 | — | ||||||
| TOTAL ASSETS | $ | 5,944,116 | $ | 2,358,005 | ||||
| Liabilities and Stockholder’s Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 313,157 | $ | 132,367 | ||||
| Accrued expenses | 273,839 | 270,199 | ||||||
| Income taxes payable | 69,300 | 240,700 | ||||||
| Line of credit | 50,000 | 176,865 | ||||||
| Short-term loans | 72,878 | 38,145 | ||||||
| Long-term debt, current portion | 329,514 | 219,932 | ||||||
| Due to related party | 45,644 | 43,288 | ||||||
| Total current Liabilities | 1,154,332 | 1,121,496 | ||||||
| Long-term debt, net | 2,226,635 | 641,692 | ||||||
| Deferred income taxes | 882,400 | 400,500 | ||||||
| Total Liabilities | 4,263,367 | 2,163,688 | ||||||
| Commitments and contingencies | ||||||||
| Stockholder’s Equity | ||||||||
| Preferred Stock, $0.0001 par value, 20,000,000 shares authorized; 1,000 shares outstanding as of September 30, 2018 and December 31, 2017, respectively | — | — | ||||||
| Common Stock, $0.0001 par value, 100,000,000 shares authorized; 24,330,000 shares issued, issuable and outstanding as of September 30, 2018 and December 31, 2017, respectively | 2,433 | 2,433 | ||||||
| Discount on common stock | (50 | ) | (50 | ) | ||||
| Additional paid-in capital | 460,655 | 460,655 | ||||||
| Retained Earnings (Accumulated deficit) | 1,217,711 | (268,721 | ) | |||||
| Total Stockholders’ Equity | 1,680,749 | 194,317 | ||||||
| Total Liabilities and Stockholder’s Equity | $ | 5,944,116 | $ | 2,358,005 | ||||
| * | Derived from audited information |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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POWERCOMM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| As Amended | As Amended | |||||||||||||||
| Net Revenue | $ | 3,819,180 | $ | 2,211,576 | $ | 10,711,621 | $ | 4,844,554 | ||||||||
| Cost of Revenue | 2,970,703 | 1,486,305 | 7,630,475 | 3,412,269 | ||||||||||||
| Gross Profit | 848,477 | 725,271 | 3,081,146 | 1,432,285 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 304,270 | 185,080 | 797,927 | 560,787 | ||||||||||||
| Depreciation expense | 84,537 | 63,499 | 222,741 | 169,435 | ||||||||||||
| Share based compensation | — | — | — | 131,560 | ||||||||||||
| Total Operating Expense | 388,807 | 248,579 | 1,020,668 | 861,782 | ||||||||||||
| Operating Income | 459,670 | 476,692 | 2,060,478 | 570,503 | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Expense | (19,596 | ) | (13,909 | ) | (65,416 | ) | (58,068 | ) | ||||||||
| Other Income (Expense), net | 36,449 | — | 38,258 | — | ||||||||||||
| Total Other Income (Expense) | 16,853 | (13,909 | ) | (27,158 | ) | (58,068 | ) | |||||||||
| Income from operations before income tax | 476,523 | 462,783 | 2,033,320 | 512,435 | ||||||||||||
| Income tax expense | 294,500 | 361,400 | 546,888 | 361,400 | ||||||||||||
| Net Income | $ | 182,023 | $ | 101,383 | $ | 1,486,432 | $ | 151,035 | ||||||||
| Income per share - basic and diluted | $ | 0.01 | $ | 0.00 | $ | 0.06 | $ | 0.01 | ||||||||
| Weighted average common shares outstanding - basic and diluted | 24,330,000 | 23,300,000 | 24,330,000 | 22,347,363 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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POWERCOMM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| For the Nine months ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| As Amended | ||||||||
| Operating Activities | ||||||||
| Net Income | $ | 1,486,432 | $ | 151,035 | ||||
| Adjustments to reconcile net income to net cash provided (used) in operating activities: | ||||||||
| Depreciation and amortization | 222,741 | 169,435 | ||||||
| Gain on disposal of assets | (36,460 | ) | — | |||||
| Stock based compensation | — | 131,560 | ||||||
| Changes in Operating Assets and Liabilities | ||||||||
| (Increase) decrease in Accounts receivable | (1,151,579 | ) | (239,580 | ) | ||||
| (Increase) decrease in Prepaid expenses and Other current assets | 109,288 | 25,659 | ||||||
| Increase (decrease) in Accounts payable | 180,792 | — | ||||||
| Increase (decrease) in Accrued expenses | 3,640 | 5,874 | ||||||
| Increase (decrease) in Other current liabilities | — | 20,711 | ||||||
| Increase (decrease) in Current income taxes payable | (171,400 | ) | 42,900 | |||||
| Increase (decrease) in Deferred income taxes payable | 481,900 | 318,500 | ||||||
| Net cash provided by operating activities | 1,125,354 | 626,094 | ||||||
| Investing Activities | ||||||||
| Capital expenditures | (488,184 | ) | (29,969 | ) | ||||
| Proceeds from disposal of capital assets | 15,547 | — | ||||||
| BioFuel investment | — | (1,750 | ) | |||||
| Net cash used in investing activities | (472,637 | ) | (31,719 | ) | ||||
| Financing Activities | ||||||||
| Repayment of related party advances | (2,644 | ) | — | |||||
| Note payable principal payments | (594,363 | ) | (382,905 | ) | ||||
| Line of credit repayments, net | (126,865 | ) | — | |||||
| Proceeds from long term debt, net | — | 40,590 | ||||||
| Loan fees paid | (20,614 | ) | — | |||||
| Proceeds from advances – related party | 5,000 | 86,871 | ||||||
| Net cash (used in) provided by financing activities | (739,486 | ) | (255,444 | ) | ||||
| Net increase (decrease) in cash | (86,769 | ) | 338,931 | |||||
| Cash, beginning of period | 715,499 | 49,744 | ||||||
| Cash, end of period | $ | 628,730 | $ | 388,675 | ||||
| Supplemental Disclosures: | ||||||||
| Cash paid during period for: | ||||||||
| Interest | $ | 65,416 | $ | 58,068 | ||||
| Taxes | $ | 236,388 | $ | — | ||||
| Non-cash investing and financing activities: | ||||||||
| Equipment purchases financed | $ | 704,867 | $ | 382,383 | ||||
| Insurance proceeds receivable | $ | 49,801 | — | |||||
| Real estate purchase financed | $ | 1,338,750 | $ | — | ||||
| Financed insurance premiums | $ | 289,157 | $ | — | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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POWERCOMM HOLDINGS INC.
Notes to Unaudited Financial Statements
September 30, 2018
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
The Company was incorporated in the State of Delaware on January 12, 2015, and was formerly known as White Grotto Acquisition Corporation (“White Grotto” or “White Grotto Acquisition”). On September 14, 2015, the Company implemented a change of control by issuing shares to new shareholders, redeeming shares of existing shareholders, electing new officers and directors and accepting the resignations of its then existing officers and directors. In connection with the change of control, the shareholders of the Company and its board of directors unanimously approved the change of the Company’s name from White Grotto Acquisition Corporation to PowerComm Holdings, Inc.
On November 15, 2016, the Company entered into a merger agreement (the “Acquisition”) with PowerComm Construction, Inc., a Virginia corporation (“PCC”). The current business of PCC is in electric utility, fiber optic, and telecommunications construction and maintenance services. PCC installs, connects and services the energy and communications sectors. Pursuant to the Acquisition, the Company has acquired the business plan, operations and contracts of its now wholly-owned subsidiary, PowerComm Construction, Inc. (“PCC” or “PowerComm Construction”).
PRINCIPALS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned or controlled subsidiaries. All material intercompany accounts, transactions and profits have been eliminated in consolidation.
BASIS OF PRESENTATION UNAUDITED INTERIM FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 2018 and the condensed consolidated statements of operations and cash flows for the nine-month periods ended September 30, 2018 and 2017 have been prepared by the Company without audit. The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date, but does not include all required year-end disclosures. In the opinion of management, such statements include all adjustments considered necessary to present fairly the Company’s financial position as of September 30, 2018 and December 31, 2017, and its results of operations and cash flows for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the years ended December 31, 2017 and 2016, included in the Form 10-K filed by the Company on June 6, 2018.
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the interim information presented not misleading. Operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.Significant estimates include, but are not limited to, assumptions used in our impairment testing of long-lived assets.
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CASH AND CASH EQUIVALENTS
The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with original maturities of three months or less, when purchased, to be cash and cash equivalents. As of September 30, 2018, and December 31, 2017, the Company has unsecured deposits of $345,068 and $480,360, respectively.
REVENUE RECOGNITION
The Company performs underground and overhead utility services primarily in the eastern and southeastern regions of the United States for utility companies. The Company’s work is performed under cost-plus-fee contracts. The length of the Company’s contracts vary, but are typically two to three years in length. While the contracts that the Company enters into are multi-year in nature, the services performed under those contracts generally occurs under discrete projects that are individually billed and that range from a couple of weeks to as short as a few days in length. In most instances, the Company bills its customer on a near daily basis. Prior to adoption of ASC 606, the Company’s policy was that revenue became fixed and determinable upon signoff of the work performed by the customer. Upon signoff, the customer accepted the work performed and therefore no warranty or defect allowances were able to be presented by the customer. Upon adoption of ASC 606, revenue becomes recognizable by the Company when control of the goods and services performed are transferred to the customer. The Company’s policy is that transfer of control occurs when the customer signs off on the work performed. The result of the adoption of ASC 606, therefore, did not constitute a material change in how the Company recognizes revenue.
COST OF REVENUE
Costs of revenue include all direct materials, labor costs, equipment and those indirect costs, including depreciation of machinery and equipment, trucks and vehicles, and indirect labor, supplies, tools, repairs and miscellaneous job costs. Changes in job performance, job conditions and estimated profitability, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
DEBT ISSUANCE COSTS
Certain fees and costs incurred to obtain long-term financing are capitalized and included as Intangible Assets in the condensed consolidated balance sheet, net of accumulated amortization. These costs are amortized to interest expense over the term of the related debt. When debt is extinguished prior to its maturity date, the amortization of the remaining unamortized debt issuance costs, or pro-rata portion thereof, is charged to loss on extinguishment of debt. Unamortized debt issuance costs were $20,614 and $0 as of September 30, 2018 and 2017, respectively.
RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net loss.
NOTE 3 – REVENUE
The Company adopted the provisions of the guidance in the new revenue standard under ASC 606 effective January 1, 2018 applying the modified retrospective method to all contracts. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under previous revenue recognition guidance. The adoption of this guidance did not have any material impact on the Company’s consolidated condensed financial statements. As was discussed in Note 2, there was no material impact to net revenue for the nine months ended September 30, 2018 as a result of applying the new revenue recognition guidance.
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NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| June 30, 2018 | December 31, 2017 | |||||||
| Land | $ | 442,400 | $ | — | ||||
| Building and improvements | 1,162,668 | — | ||||||
| Vehicles & trucks | 2,956,293 | 2,241,584 | ||||||
| Machinery & equipment | 704,286 | 560,723 | ||||||
| Office furniture & fixtures | 140,397 | 103,686 | ||||||
| Computer & software | 25,647 | 25,647 | ||||||
| 5,431,691 | 2,931,640 | |||||||
| Less: Accumulated depreciation | (2,037,093 | ) | (1,817,215 | ) | ||||
| Net property and equipment | $ | 3,394,598 | $ | 1,114,425 | ||||
Depreciation expense was $222,741 and $169,435 for the nine months ended September 30, 2018 and 2017, respectively.
During the quarter ended September 30, 2018, two capital items were wrecked, or otherwise damaged beyond repair. Claims were filed with the Company’s insurance carrier and settlements totaling $65,348 have been received. Gains on disposal totaling $36,460 were recorded in the third quarter and included in ‘Other income and expense’.
REAL ESTATE ACQUISTION
On July 12, 2018, the Company, jointly with a related entity, closed on the purchase of an industrial property in Upper Marlboro, Prince George’s County, Maryland. The Company paid $1.575 million plus closing costs. The industrial property is approximately 1.77 acres, fenced and paved, which will provide for the ability of the Company to significantly increase its truck fleet and has an office building and drive up warehouse of approximately 12,000 square feet. The facility will house all of the Company’s operations and will function as corporate headquarters. The Company financed 85% of the purchase price, or approximately $1.339 million. The purchase loan bears interest at a rate of 5.24% per annum, payable over 10 years at $8,076 monthly with a payment due on the 120th month estimated at approximately $1,008,000, and is secured with a first mortgage on the real estate and the personal guarantee of David Kwasnik, the Chief Executive Officer and majority shareholder of the Company. The purchase loan was made to the Company and to Kwasnik Properties, LLC (the “LLC”) on a joint and several basis. The two members of the LLC are David and Laura Kwasnik, both officers and majority shareholders of the Company. After miscellaneous improvements the Company has begun moving all operating assets and personnel to the new facilities.
The Company has included the financial statements of the LLC in these consolidated financial statements and will continue to do so in future filings in accordance with the “Variable Interest Entity” rules.
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NOTE 5 - DEBT
Lines of Credit
Lines of credit consist of the following:
| September 30, 2018 | December, 31, 2017 | |||||||
| $500,000 Line of Credit with Branch Banking and Trust Company (“BB&T”), variable interest rate equal to BB&T’s Prime Rate, at 5.25% per annum as of September 30, 2018, due on July 12, 2020, interest due monthly, secured by all assets of the Company. The Company incurred $11,457 of costs associated with this line of credit and will amortize these costs ratably over the life of the line of credit. | $ | 50,000 | $ | — | ||||
| $200,000 Line of Credit with SunTrust Bank, variable interest rate equal to the Prime Rate as published in the Wall Street Journal plus 6%, secured by all assets of the Company. Retired as of September 30, 2018. | — | 176,865 | ||||||
| Total Lines of Credit | $ | 50,000 | $ | 176,865 | ||||
On July 12, 2018, the Company’s subsidiary, PowerComm Construction, Inc., entered into a $500,000 line of credit with a lending institution. The line of credit, in the form of a promissory note (the “Note”), matures on July 12, 2020, when all unpaid principal and interest become due and payable. The interest rate on the Note is variable and is based on the Lender’s Prime Rate, currently at 5.25%, and is due monthly. A component of the acquisition of the new line of credit was paying off and closing the existing $200,000 line of credit with Sun Trust Bank.
Short Term Debt
Short term debt consists of the following:
| September 30, 2018 | December 31, 2017 | |||||||
| Notes payable to an insurance premium finance company, terms ranging from six to nine months, bearing interest at rates ranging from 7.2% to 9.3%, per annum, monthly payments totaling $32,055, secured by various insurance policies and all rights thereto. | $ | 72,878 | $ | 38,145 | ||||
| Total Short Term Debt | $ | 72,878 | $ | 38,145 | ||||
Long-term debt
Long-term debt consists of the following:
| September 30, 2018 | December 31, 2017 | |||||||
| Multiple notes payable, to various banks and finance organizations, maturing at various dates from February 2019 through August 2024, bearing interest rates ranging from 0% to 8.0%, per annum, monthly payments totaling $39,790, secured by vehicles and equipment | $ | 1,237,645 | $ | 861,624 | ||||
| Note payable to a bank, maturing in July 2028, bearing interest at a rate of 5.24% per annum, monthly payment of $8,075, secured by real estate. The Company paid loan costs in the amount of $9,157 | 1,327,655 | — | ||||||
| 2,565,300 | 861,624 | |||||||
| Less: Current Portion | (329,508 | ) | (219,932 | ) | ||||
| Less: Discount | (9,157 | ) | — | |||||
| Total Long Term Debt | $ | 2,226,635 | $ | 641,692 | ||||
NOTE 6 - DUE TO RELATED PARTY
As of September 30, 2018 and December 31, 2017, the balances due to a related party amounted to $45,644 and $43,288, respectively, and are unsecured. There is no written agreement and the funds are due on demand with no maturity date, and bearing no interest.
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NOTE 7 - INCOME TAXES AND CORRECTION OF AN ERROR
The following table shows a reconciliation of income tax expense between the amount reported and the amount under the statutory tax rates in effect for the nine months ended September 30, 2018 and 2017, respectively:
| September 30, 2018 | September 30, 2017 (as amended) | |||||||
| Income tax expense from statutory rate | $ | 549,000 | $ | 205,000 | ||||
| Effect of change in tax status | — | 107,100 | ||||||
| Other items | (6,112 | ) | (8,300 | ) | ||||
| Effect of permanent timing differences | 4,000 | 57,600 | ||||||
| Income tax expense, as reported | $ | 546,888 | $ | 361,400 | ||||
The current income tax provision represents the estimated amount of income taxes paid or payable for the year, as well as changes in estimates from prior years. The deferred income tax provision represents the change in deferred tax liabilities and assets. The following table presents the significant components of the provision for income taxes:
| September 30, 2018 | September 30, 2017 (as amended) | |||||||
| Current | ||||||||
| Federal | $ | 51,400 | $ | 35,400 | ||||
| State | 17,900 | 7,500 | ||||||
| Total current provision | $ | 69,300 | $ | 42,900 | ||||
| Deferred | ||||||||
| Federal | $ | 352,388 | $ | 236,000 | ||||
| State | 125,200 | 82,500 | ||||||
| Total deferred provision | $ | 477,588 | $ | 318,500 | ||||
| Income tax expense | $ | 546,888 | $ | 361,400 | ||||
On December 22, 2017, the Tax Act was signed into law and significantly reformed the Internal Revenue Code of 1986, as amended. The Tax Act will significantly impact the Company by reducing the federal corporate tax rate from 35% to 21%, effective January 1, 2018, and by allowing expensing of certain capital expenditures. However, the Tax Act limits the deductibility of meals, entertainment expenses and certain executive compensation, imposes limitations on the deductibility of interest expense and eliminates the domestic production activities deduction.
Shortly after the Tax Act was enacted, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the application of GAAP and direct taxpayers to consider the impact of the Act as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law. In accordance with SAB 118, the Company has recognized the provisional tax impacts, outlined above, related to the re-measurement of its net deferred tax liability. The ultimate impact may differ from the provisional amounts, possibly materially, due to, among other things, the significant complexity of the Tax Act, anticipated additional regulatory guidance or related interpretations that may be issued by the Internal Revenue Service (the “IRS”), changes in accounting standards, legislative actions, future actions by states within the U.S. and changes in estimate, analysis, interpretations and assumptions the Company has made.
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Deferred income taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities and available net operating loss and tax credit carryforwards. Temporary differences and carryforwards that comprised deferred income tax assets and liabilities were as follows:
| September 30, 2018 | September 30, 2017 (as amended) | |||||||
| Deferred income tax assets | ||||||||
| Investments | $ | (51,900 | ) | $ | (51,900 | ) | ||
| Deferred income tax liabilities | ||||||||
| Depreciation | 286,600 | 287,200 | ||||||
| Cash basis timing adjustment | 647,700 | 83,200 | ||||||
| 934,400 | 370,400 | |||||||
| Net deferred income tax liability | $ | 882,400 | $ | 318,500 | ||||
The Company’s deferred income tax assets and liabilities are subject to adjustment in future periods based on the Company’s ongoing evaluations of such deferred assets and liabilities and new information available to the Company.
Valuation allowances are recognized on deferred tax assets if the Company believes it is more likely than not that some or all of the deferred tax assets will not be realized. The Company believes the majority of the deferred tax assets will be realized due to the reversal of certain significant temporary differences and anticipated future taxable income from operations and, accordingly, has not recorded an allowance.
Correction of an Error
In the period ended September 30, 2017, the Company did not properly record its expected current and deferred income tax liabilities for its expected income tax expense. The table below shows the correction of this error:
| As originally Presented | Correction | As Amended | ||||||||||
| Current income taxes payable | $ | 0 | $ | 42,900 | $ | 42,900 | ||||||
| Total current liabilities | $ | 1,097,475 | $ | 42,900 | $ | 1,140,375 | ||||||
| Deferred income taxes payable | $ | 0 | $ | 318,500 | $ | 318,500 | ||||||
| Total liabilities | $ | 1,619,129 | $ | 318,500 | $ | 1,937,629 | ||||||
| Retained earnings (Accumulated Deficit) | $ | (71,209 | ) | $ | (361,400 | ) | $ | (432,609 | ) | |||
| Total liabilities and stockholders’ equity | $ | 1,683,038 | $ | — | $ | 1,683,038 | ||||||
In the period ended September 30, 2017, the Company did not properly record its expected current and deferred income tax liabilities for its expected income tax expense. The table below shows the correction of this error:
| As originally Presented | Correction | As Amended | ||||||||||
| Income tax expense | $ | 0 | $ | 361,400 | $ | 361,400 | ||||||
| Net Income | $ | 512,435 | $ | (361,400 | ) | $ | 151,035 | |||||
| Earnings per share | $ | 0.02 | $ | (0.01 | ) | $ | 0.01 | |||||
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NOTE 9 – CUSTOMER CONCENTRATIONS
For the nine months ended September 30, 2018 and 2017, respectively, service revenue from Potomac Electric Power Co (“PEPCO”), which is now a wholly owned subsidiary of Exelon Corp, accounted for 98% and 78% of the Company’s net revenue, respectively. Accounts receivable due from PEPCO accounted for 100% and 63% of the Company accounts receivable balances as of September 30, 2018 and 2017, respectively. For the year ended December 31, 2017, three customers accounted for 100% of the Company’s revenues and two customers accounted for 100% of its accounts receivable balance.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our audited financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.
Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, gross margin and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. This forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to our liquidity requirements, the continued growth of the software industry, the success of our product development, marketing and sales activities, vigorous competition in the construction industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.
Overview
PowerComm Holdings, Inc., through its wholly owned subsidiary PowerComm Construction, Inc., installs, connects and services the energy and communications sectors. Experienced PCC teams also build and maintain America’s infrastructure from fiber-optic lines to high voltage lines to cellular communication towers. The current business of PCC is in electric utility, fiber optic, and telecommunications construction and maintenance services. PCC has provided for almost 20 years a diverse range of power services, telecommunications and fiber optic services and cellular services. PCC is a longstanding service provider that works on complex projects for industry leaders. PCC service crews perform electrical power line work on overhead and underground power distribution infrastructures as well as on transmission and sub-transmission lines.
The Company has expertise in a variety of electric utility, fiber optic, and telecommunications construction and maintenance services and is qualified also to do business in all 50 states, the District of Columbia and Puerto Rico The current business of the Company is in electric utility, fiber optic, and telecommunications construction and maintenance services. The Company installs, connects and services the energy and communications sectors. Experienced teams also build and maintain America’s infrastructure from fiber-optic lines to high voltage lines to cellular communication towers. The Company has its headquarters in Northern Virginia, with offices in Southern Maryland, Nashville, Tennessee, and Washington, D.C.
The Company has filed a registration statement on Form S-1 to register the resales of common stock shares held by certain existing shareholders of the Company. As of the date of this Report, the registration statement was under review by the U.S. Securities and Exchange Commission.
For the nine months ended September 30, 2018, the Company generated $10,711,621 in net revenues and had net income of $1,486,432. As of September 30, 2018, the Company had retained earnings of $1,217,711.
Revenues and Income
During the three months ended September 30, 2018, the Company posted net revenues of $3,819,180, total operating expenses of $388,807, consisting of salary and wage expenses of $161,640 depreciation of $84,537 and other general and administrative expenses of $142,630 and net income of $182,023. In comparison, during the three months ended September 30, 2017, the Company posted net revenues of $2,211,576, total operating expenses of $248,579, consisting of salary and wage expenses of $84,819, depreciation of $63,499 and other general and administrative expenses of $100,261 and net income of $101,383.
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During the three months ended September 30, 2018, the Company incurred cost of revenue of $2,970,703, compared to cost of revenue of $1,486,305 for the three months ended June 30, 2017. The increase in cost of revenue was a result of increased costs relative to the increase in revenue from customer contracts.
Based on past performance, the Company is dependent on revenues generated from Potomac Electric Power Co. and RCN Telecom Services, LLC. For the nine months ended September 30, 2018 and 2017, service revenue from Potomac Electric Power Co. accounted for 98% and 78% of the Company’s net revenue, respectively.
Liquidity and Capital Resources
As of September 30, 2018, the Company had improved its working capital position from $0.122 million as of December 31, 2017 to $1.384 million and had a cash position of approximately $629,000 compared to approximately $715,000 as of December 31, 2017. In addition, for the nine months ended September 30, 2018, the Company’s cash flows from operating activities increased to approximately $1,125,000 from cash flows provided by operations of approximately $626,000 for the nine months ended June 30, 2017. The Company has been notified that it is now a preferred vendor for all of Exelon Corp. and has begun receiving new contracts and has begun bidding on additional contracts. In 2017, and to date in 2018, the Company has significantly increased its revenue run rate and expects the increases to continue through the remainder of 2018 and into 2019. The increased revenue has allowed the Company to begin operating profitably and the Company expects that those conditions will not only continue but increase in the coming quarters as new contracts are received and executed upon.
Results of Operations
Discussion of the three months ended September 30, 2018 as compared to the three months ended June 30, 2017
Our total revenue was $3,819,180 compared to $2,211,576 for the three month periods ended September 30, 2018 and 2017, respectively, representing an increase of $1,607,604, or approximately 73%, in 2018. The increase in our revenue in the third quarter of 2018, as compared to the same period in 2017, can largely be attributed to many positive events, including being named a Contractor of Choice for PEPCO / Exelon, which led to the Company being awarded contracts from PEPCO including one for $56 million and two others for $5 million and $4 million, respectively. Additionally, going forward in 2018, the Company has recently obtained contracts with companies such as Southern Company, Georgia Power, Gulf Power, Entergy and its affiliates, and Google, among others. In June 2016, PCC received minority-owned certification status from the Capital Region of the National Minority Supplier Development Council (“NMSDC”). NMSDC is one of the country’s leading corporate membership organizations committed to helping supplier diversity by matching certified minority-owned businesses to its vast network corporate members who wish to purchase their products, services and solutions. Its corporate membership includes many of the largest public and privately-owned companies, as well healthcare companies, colleges and universities. NMSDC maintains rigorous certification standards and PCC anticipates that such certification will provide a large base for growth and potential new projects.
Our cost of revenue was $2,970,703 compared to $1,486,305 for the three month periods ended September 30, 2018 and 2017, respectively, representing an increase of $1,484,398 or approximately 100%, in 2018 comparing that in 2017. The increase is the result of the 73% growth in revenues. The gross margin on revenue dropped from 33% in 2017 to 22% in 2018. Our margin difference between the respective quarterly periods can, in part, be attributed to several factors. Due to our rapid increase in revenues the Company has to anticipate the staffing and infrastructure necessary to accommodate that growth. Accordingly, we hire staff and acquire the equipment and tools ahead of the work start dates. This growth, and related costs, are due in great part to a ramp up in work for low/high voltage conduit line work that we expect to see increased billings starting in the 4th quarter, but more materially so in the first quarter of 2019.
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Although the net changes and percent changes for our revenues and our cost of revenue for the three month periods ended September 30, 2018 and 2017 are summarized above, these trends should not necessarily be viewed as a definitive indication of our future results.
Gross profit was $848,477 compared to $725,271 for the three months ending September 30, 2018 and 2017, respectively, a decrease of $123,206, or 17%, from 2018 to 2017. The decrease in gross profit as a percentage of revenue was mainly due to a substantial growth in payroll and other costs of sales that was necessary to accommodate the increased work under new contracts that we expect to bill in the 4th quarter.
The operating expenses for the Company were $388,807 compared to $248,579 for the three months ended September 30, 2018 and 2017, respectively, representing an increase of $140,228, or 56%, in the three months ended September 30, 2018 compared to the same period in 2017. The increase is due, primarily, to and to an increase in depreciation expense and payroll. We expect payroll will continue to grow as the Company continues to grow.
Interest expense was $19,596 compared to $13,909 in the three month periods ended September 30, 2018 and 2017, respectively, an increase of approximately 41%. The change in interest expense for the quarter-end periods was due primarily to the fact that the Company acquired the real estate that is now the location of its new headquarters and financed approximately $1.4 million of the purchase. Additionally, the Company continues to acquire machinery and equipment, primarily vehicles, and has financed the majority of those acquisitions through various banks and finance companies.
Discussion of the nine months ended September 30, 2018 as compared to the nine months ended June 30, 2017
Our total revenue was $10,711,621 compared to $4,844,554 for the nine month periods ended September 30, 2018 and 2017, respectively, representing an increase of $5,867,067, or approximately 121%, in 2018. The increase in our revenue in the first nine months of 2018, as compared to the same period in 2017, can largely be attributed to many positive events, including being named a Contractor of Choice for PEPCO / Exelon, which led to the Company being awarded contracts from PEPCO including one for $56 million and two others for $5 million and $4 million, respectively. Additionally, going forward in 2018, the Company has recently obtained contracts with companies such as Southern Company, Georgia Power, Gulf Power, Entergy and its affiliates, and Google, among others. In June 2016, PCC received minority-owned certification status from the Capital Region of the National Minority Supplier Development Council (“NMSDC”). NMSDC is one of the country’s leading corporate membership organizations committed to helping supplier diversity by matching certified minority-owned businesses to its vast network corporate members who wish to purchase their products, services and solutions. Its corporate membership includes many of the largest public and privately-owned companies, as well healthcare companies, colleges and universities. NMSDC maintains rigorous certification standards and PCC anticipates that such certification will provide a large base for growth and potential new projects.
Our cost of revenue was $7,630,475 compared to $3,412,269 for the nine month periods ended September 30, 2018 and 2017, respectively, representing an increase of $4,218,206, or approximately 124%, in 2018 comparing that in 2017. The increase is the result of the 121% growth in revenues. Even with this growth in cost of revenues of 124%, the gross margin on revenue remained stable at 30% in 2017 compared to 29% in 2018. We expect our margin to remain in this range through the last quarter of 2018 and into 2019 as the Company continues to grow rapidly and hires employees and incurs costs necessary to manage that growth. More specifically, this growth, and related costs, are due in great part to a ramp up in work for low/high voltage conduit line work that we expect to see increased billings from starting in the 4th quarter, but more materially so in the first quarter of 2019.
Although the net changes and percent changes for our revenues and our cost of revenue for the nine month periods ended September 30, 2018 and 2017 are summarized above, these trends should not necessarily be viewed as a definitive indication of our future results.
Gross profit was $3,081,146 compared to $1,432,285 for the nine months ending September 30, 2018 and 2017, respectively, an increase of $1,648,861, or 115%, from 2017 to 2018. The increase was mainly due to the significant growth of 121% in revenue, as noted above, and to a ramp up in work for low/high voltage conduit line work that we expect to see increased billings from starting in the 4th quarter, but more materially so in the first quarter of 2019.
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The operating expenses for the Company were $1,020,668 compared to $861,782 for the nine months ended September 30, 2018 and 2017, respectively, representing an increase of $158,886, or 18%, in the nine months ended September 30, 2018 compared to the same period in 2017. The increase is due to increases in wages and normal business operation costs that accompanied our growth in revenue, as described above, including an increase in depreciation expense and is net of a one-time charge in 2017 for share based compensation of $131,560.
Interest expense was $65,416 compared to $58,068 in the nine month periods ended September 30, 2018 and 2017, respectively, an increase of approximately 13%. The change in interest expense for the respective nine-month periods was due primarily to the fact that the Company acquired the real estate that is now the location of its new headquarters and financed approximately $1.4 million of the purchase. Additionally, the Company continues to acquire machinery and equipment, primarily vehicles, and has financed the majority of those acquisitions through various banks and finance companies.
Changes in Cash Flow
Operating Activities
The Company had net cash provided by operating activities for the nine months ended September 30, 2018 of $1,125,354 compared to net cash provided by operating activities for the nine months ended June 30, 2017 of $626,094, an improvement to cash of approximately $499,260. Cash provided by operating activities is driven by our net income and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments include depreciation and gain on disposal of assets, as well as stock based compensation. The non-cash adjustment for depreciation totaled $222,741 and $169,435 for the nine months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018, the net negative change in operating assets and liabilities was $547,359 compared to the nine months ended June 30, 2017 where the net negative change in operating assets and liabilities was $187,336. The negative change in operating assets and liabilities had a much greater impact on net cash provided by operating activities for the nine months ended September 30, 2018 compared to the nine months ended June 30, 2017.
Investing activities
Capital expenditures, primarily the purchase of vehicles and equipment, was $221,866 for the nine months ended September 30, 2018 compared to $29,969 in the comparable period in 2017. A capital expenditure was made for the acquisition of the new company headquarters totaling $266,318 in the quarter ended September 30, 2018. Additionally, there was a miscellaneous $1,750 use of cash for investing activities for the nine months ended June 30, 2017. There was no comparable use of cash in the same period in 2018.
Financing Activities
Net cash used by financing activities was $739,486 for the nine months ended September 30, 2018 compared to net cash used by financing activities of $255,444 for the nine months ended June 30, 2017. The primary difference is that in the nine months ended September 30, 2018, we used cash to reduce our debt by $723,872, including payments of $2,644 to reduce a payable to a related party. This is compared to payments to reduce debt of $382,905, net of proceeds from a payable to a related party of $86,871 and net of approximately $40,590 in loan proceeds in the nine months ended June 30, 2017.
Expected 4th quarter changes in liquidity
The Company’s main operating subsidiaries are cash basis taxpayers. The most effective way to manage our current income tax liability is through expending cash in the 4th quarter to pay for normal recurring expenses in an accelerated manner in order to reduce our US Federal and multi state tax liabilities. We expect to deploy most of our current cash availability plus also use our availability under our line of credit in order to accelerate payments to our vendors in order to reduce our tax liability. This will have a significant impact on our short term liquidity. However, because we are only accelerating our payments to vendors, we expect that this will reverse itself in the 1st quarter of 2019 as our payments to vendors will be significantly reduced due to the accelerated payments in the 4th quarter of 2018.
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Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Sources of Revenue
The Company earns revenue from executing its business plan and continuing to provide electric utility, fiber optic, and telecommunications construction and maintenance services through its wholly owned subsidiary, PowerComm Construction, Inc.
Critical Accounting Policies
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Information not required to be filed by a smaller reporting company.
ITEM 4. Controls and Procedures.
Disclosure Controls and Procedures
Pursuant to Rules adopted by the Securities and Exchange Commission, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules. This evaluation was done as of the end of the period covered by this report by the Company’s principal executive officer (who is also the principal financial officer) in consultation with an outside accounting advisor.
Based upon that evaluation, the Company’s principal executive officer has concluded that the Company’s disclosure controls and procedures are not effective in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company intends to engage outside accounting advisors to assist the Company in implementing effective disclosure controls and procedures.
Changes in Internal Controls over Financial Reporting
There was no change in the Company’s internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. As of September 30, 2018, there were no other such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None for the nine months ended September 30, 2018.
No Changes in Nomination Procedures
During the quarter covered by this Report, there were not any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
| 10.3 | Construction Contract between PHI Service Company and PowerComm Construction Inc. (filed as an exhibit to the Form 8-K/A filed October 5, 2017) | |
| 31* | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32* | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: December 3, 2018
| POWERCOMM HOLDINGS, INC. | ||
| By: | /s/ David Kwasnik | |
| Name: | David Kwasnik | |
| Title: | Chief Executive Officer, Chief Financial Officer | |
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